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Structural Changes 22.05.15
What the long-term price charts are saying
I’ve been noticing an unusually high number of Twitter Spaces these days.
People have all sorts of theories about where this market is headed. And the predictions are as divided as ever:
“Interest rates can’t rise much further as it’ll break the economy” vs. “interest rates have much further to rise as inflation is out of control.”
“Growth stocks are cheap” vs. “Growth stocks are still expensive.”
“Commodity stocks are in a new secular bull market” vs. “Fade the commodity rally.”
As trend followers, we don’t need to know where the market will be in the future, nor try to make sense of all the mechanics behind it. The price charts tell us all we need to know. And they’re showing some major, structural changes happening.
If you’re reading this post via e-mail, it will get truncated - head over to the blog for the full post. Let’s dive in.
Bonds & Rates
US 30yr Mortgage Rate, Monthly. In the past 6 months, rates have shot up 220 bps – the fastest rise ever. And they’re now coming out of a 10-year base after being in a 40yr downtrend.
IEF Monthly. The inverse of rates is bond prices, and they made a major breakdown in March. Bonds are in their largest drawdown in at least 2 decades.
Like the IEF chart, large-cap growth stocks like FB and NFLX are showing major breakdowns on their monthly charts:
This is a structural shift to the uptrend that’s been in place since 2009.
We all know that the smaller, profitless tech companies got hit even harder. ARKK has erased all the enormous 2020 gains just as quickly as they appeared.
Such a massive unwind is a trait of a market that isn’t returning to its glory days soon. Think Nasdaq 2000-2012, Gold 2011-2018, Oil from 2007-2020. In fact, when you offset a price chart of QQQ by 21 years and overlay onto ARK, the similarities are uncanny.
Then again, the revenues & revenue growth rates of tech stocks today are superior to that of the late 90s. The BVP Cloud Index contains 76 growth stocks that have a median earnings growth rate of 33%. And they’re trading at a forward Price/Gross Margin* multiple of 7.8x.
*Aside: High growth stocks tend to re-invest all gross earnings back in their business, so the regular P/E is meaningless. Gross margin removes COGS (Cost of goods sold) from revenues, but is before R&D, SG&A, and taxes.
Looking at the S&P 600 Small-caps (companies that do have net earnings), we’re trading at a forward P/E of about 12. In 2008 and Mar 2020, this value made a major bottom around 10.
So, does that mean these stocks come roaring back like the growth bulls say, or do they meander like the Nasdaq did in the 2000s? The answer is probably somewhere in between.
If you really want something to compare with the 90’s dot-com mania, it might be crypto.
LUNA and UST were all over the new this week.
UST was the 3rd largest stablecoin (a coin that maintains a 1:1 peg against fiat currencies like the US dollar). But unlike Tether (which is fully backed by US dollars), UST did not hold any reserves (that is, until a few months ago it started holding partial reserves in BTC). The peg was maintained just by an algorithm that relied on arbitragers to swap between UST and the sister coin, LUNA.
Last week, UST came under attack and its peg broke. LUNA went to zero from a high of $120 just 6 weeks ago. That’s >$50B in market cap erased. Rumors are that the trader (attacker) behind the crash made a net $800M (link).
Bitcoin was already weak for months, but this LUNA event has made it more so. The monthly chart looks to be showing a major structural change:
Like the 90’s tech mania, crypto is an emerging technology full of promises but lacking mass adoption. Nobody I know of actually uses crypto for anything other than speculation. “A solution looking for a problem.”
And the speculation was unlike anything I’ve seen. Laser eyes, NFTs of cartoon apes & rocks selling for millions, dog coins, Ponzi’s promising 20% returns – you name it.
For many quarters, we’ve been looking at the multi-decade base breakouts in commodities. Below are charts that I’ve shared regularly:
GSCI Commodity Index, Monthly. 7yr base breakout early this year, and strong uptrend.
SLX, REMX, and URA Monthly. All came out of decade-long bases. Despite the chop over the past year, the long-term bullish picture is intact.
XLE, Monthly. Took out its 2007 highs in March and continues to act strong in a weak broader market.
SU, Quarterly. Coming out of a 2-decade base. Many major Canadian oil stocks have made similar breakouts in the past 2-8 months (eg. CNQ, ENB, IMO, TOU, CVE).
Reasons being cited for persistently high long-term inflation:
Increasing global demand
Europe (and other parts of the World) cutting their dependence on Russia (one of the largest producers of commodities).
Capital underinvestment (thanks to long bear market in commodities, capital discipline, ESG). Increasing supply will require building new projects.
To the last point, Fluor (one of my former employers, ticker FLR) and other EPC companies could be a major beneficiary of new investment in industrial plants. The price action agrees.
FLR Monthly. Lifting from 20yr support. Heavily tied with OIH (the Oil Services ETF).
All this is very different to the “mega themes” post I wrote in late Dec (link). Again, markets change and we trend followers have to adapt with it.
The weakness in ARKK was apparent by Q2-Q3 last year, but it wasn’t until this year that large-cap growth & bonds broke down. Now the main cryptos are cracking.
In commodities, COPX & SLX came out of major bases 15-18 months ago, REMX 11 months ago, followed by oil stocks & broader commodity indices 2-8 months ago.
These are established trends, and we need to respect them.
The silver lining of rising bond yields is that yields for stocks & real estate too are rising (we discussed this 2 weeks ago: Link). This is healthy and setting us up for a future bull market in those assets. For now, follow the strength and avoid the weakness.
That’s all for this week! If you found this post useful, please give it a like and share. Thanks for reading.
Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.